Author Archives: chrissievers

GST private rulings published in April 2012

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In April 2012, the Commissioner published over 60 private rulings on the private rulings register dealing with GST issues.

The private rulings I found interesting deal with GST refunds and going concerns.  The refund ruling appears to take the view that the Commissioner can rely on s 105-65 in the context of the operation of the adjustment provisions in Division 19 of the GST Act.

The list of the private rulings can be accessed here and through the menu on the site.

Ruling No. 1012091511798 – GST and refunds of overpayments

This application involves the perennial question of whether the Commissioner will exercise his discretion in s 105-65 and refund overpaid GST.  Where this ruling is interesting is that it appears to involve the question of whether that discretion will (or indeed can) be exercised where the refund is otherwise payable by way of an adjustment pursuant to Division 19 of the GST Act.

The facts of the ruling involve the sale of land by way of a terms contract where the parties entered into an agreement to terminate the sale contract, whereby the instalment payments were to be repaid to the purchaser.  GST had been paid on the instalments by the vendor and the purchaser had claimed input tax credits.

While it is not clear from the ruling, it appears that the basis for the refund arose from the operation of the adjustment provisions in Division 19.  Further, the Commissioner considers that s 105-65 applies because the taxpayer treated an arrangement as giving rise to a taxable supply but it did not give rise to a taxable supply.  This may be considered to be a controversial view, given that the apparent intent of s 105-65 is to address the implications of parties mistakenly treating supplies as taxable where they are not – e.g., because they are GST-free.  In the present circumstances, the parties at all times correctly treated the transaction as taxable until the transaction was cancelled, triggering Division 19 which operates to unwind the GST consequences of the transaction.  One may question whether s 105-65 should interfere with that process.

Ruling No 10102090255175 – GST and going concerns

The issue in this ruling was whether the sale of a motor vehicle repair business was GST-free as the supply of a going concern.  What I found interesting was the discussion of the implications of the statutory licence which was necessary to operate the business, but could not be transferred by the vendor.  The agreement provided that if the licence could not be transferred to the purchaser, that the vendor would make all reasonable efforts to have a new operating licence issued to the purchaser.  The ruling took the view that provided a new licence was issued to the purchaser, the vendor would be “considered to have have supplied the purchaser with an operating licence in respect of the relevant premises, for the purposes of the going concern provisions”.

I personally struggle with the conclusion in the ruling, essentially because the requirement of s 38-325(2) of the GST Act is that “the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise”.  In circumstances where the supplier has no ability to transfer a statutory licence and a new licence must be issued to the purchaser, I cannot see how the words of s 38-325(2) can be satisfied.

The private ruling refers to paragraph 53 of GSTR 2002/5 and seeks to address the issue in the following way:

In accordance with paragraph 53 of GSTR 2002/5, the supply of a thing which is incapable of assignment or supply because of a statutory or legal impediment, but which is necessary for the continued operation of an enterprise by a party other than the supplier is taken to be a supply to the purchaser of that thing for the purposes of section 38-325 of the GST Act, where the following criteria are met:

– the vendor of the enterprise makes all reasonable efforts to have the thing supplied to the recipient, for example, by way of surrender;

– the supply to the purchaser is by a statutory authority or other party to the relevant contract with the vendor; and

– the thing is actually supplied to the purchaser by a party other than the vendor.

While I can appreciate the commercial practicality of this approach, I struggle with how it can fit within the clear words of the section.  In recent times, the Federal Court appears to have moved away from the purposive, “practical business tax”, approach to the interpretation of the GST Act, towards a more literal construction.  I do wonder what the Federal Court would make of the question.

ECJ hands down judgment in VAT phone-card case, plus international cases update – April 2012

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On Friday the European Court of Justice handed down its decision in Lebara (Taxation) [2012] EUECJ C-520/10. In this case the Court was asked to determine whether the supply of phone cards by Lebara to distributors who then on-sold those cards to customers involved a single supply of telecommunication services by Lebara or (as contended by the Revenue) the supply of two services by Lebara, being (i) the issue of the card and (ii) the redemption of the card by the end user.  The Court found that only a single supply of telecommunication services was made.

The facts can be simply stated.  Lebara sold phone cards to distributors for an agreed arise (being lower than the face value of the cards), the distributors then resold the cards at their face value (either under their own brand or even under the Lebara brand) – in any event, the distributors were acting in their own name and not as agents of Lebara.  The phone cards were activated by Lebara following a request by the distributor, provided that the distributor had paid for them.  Lebara did not know the identity of the user, but had systems in place which enabled it to track each card sold, whether the card was still valid, the amount of unused credit, the numbers called – the distributors did not have access to that system.

Lebara did not account for VAT on the sale of phone cards to distributors in the basis that the transaction was a supply of telecommunication services in the Member State in which the distributor was established and that, in consequence, it was the distributor which had to pay the VAT in that Member State in accordance with the reverse charge mechanism.  Lebara contended that the actual use of the card did not entail the supply by Lebara, for consideration, of services to the end user.  By contract, the Revenue contended that Lebara had to pay VAT in the UK because it supplied two services, (i) the issue of the card, which took place t the time the card was sold to the distributor, and (2) the redemption, when the card was actually used.  The UK taxes the second supply – the taxable value was contended to be the amount paid by the distributor to Lebara which represented the use actually made of the card by the end user as a proportion of the face value of the card.

In considering the issue, the Court referred to the following principles (most of which would also have application in Australia):

  • the principle of the common system of VAT is the application to goods and services of a general tax on consumption which is exactly proportional to the price of goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged;
  • VAT is intended to tax only the final consumer and to be completely neutral as regards the taxable persons involved in the production and distribution processes prior to the stage of final taxation, regardless of the number of transactions involved;
  • it is supplies of goods or services which are subject to VAT, rather than payments made by way of consideration for such supplies
  • the supply of services is effected “for” consideration only if there is a legal relationship between the service provider and the recipient, pursuant to which there is a reciprocal performance, the remuneration received by the service provider constituting the value actually given in return for the service supplied to the recipient

In finding that Lebara made a single supply of telecommunication services, the Court found that a supply of services is only taxable if it is made “for” consideration, which presupposes a reciprocity between the service provided and the remuneration constituting the value given in return for that service – Lebara only received a single actual payment in the course of supplying its telecommunication services. Further, that payment cannot be treated as a payment made to Lebara by the end user, even if the resale of the phone card by the distributor ultimately leads to the burden of making that payment being passed on to the end user.

From an Australian perspective, the case does appear unusual, particularly as it appears that the UK was trying to claim a second amount of VAT on what was a single payment.  As is often the case, the impetus for the case may well lie in the complexities of the European system and the UK feeling that it was missing out on VAT revenue (the phone cards were sold in other Member States).  In Australia, the issue would not appear to arise as the voucher provision in Division 100 of the GST Act would operate with the effect that no GST was payable on the redemption only, not on the issue of the cards.

International cases update 

In April 2012 the following decisions were handed down in New Zealand and the UK (including the ECJ) and Canada.

New Zealand

Court of Appeal

United Kingdom and ECJ

Upper Tax Tribunal

  • Brendan McMahon v HMRC [2012] UKUT 106 – VALUE ADDED TAX – evidence of export – whether First-tier Tribunal applied correct legal test – despite incorrect statement, yes – whether tribunal’s findings of fact supported by evidence – yes – appeal dismissed
  • Sally Moher at Premier Dental Agency v HMRC [2012] UKUTB2 – VALUE ADDED TAX – exemptions – appellant engaged dental nurses and supplied them as temporary staff to dentists – whether appellant made supplies of staff or of medical treatment – supplies of staff – supplies standard-rated – appeal dismissed

First Tier Tribunal

  • Collins (t/a Unique Vehicles) v Revenue & Customs [2012] UKFTT 220 – VAT – entitlement to credit for input tax on motor cars – article 7 of VAT (Input Tax) Order 1992 (SI 1992/3222) considered – whether intention to make car available for private use – intention to use car primarily for self-drive hire – evidence of entitlement to input tax where documents contradictory or missing – 2007 statement of practice on input tax deduction without valid invoice – jurisdiction of Tribunal to review HMRC’s exercise of discretion whether to accept alternative evidence of entitlement to input tax deduction – misdeclaration penalty – appeal allowed in part
  • The Trustees of The Eaton Mews Trust v Revenue & Customs [2012] UKFTT 249 – VALUE ADDED TAX — zero-rating — construction of building — VATA s 30(2), Sch 8 Group 5 — whether retention of party wall a condition of planning consent — yes — appeal allowed
  • Sound Solutions (Europe) Ltd v Revenue & Customs [2012] UKFTT 251 – VALUE ADDED TAX- – MTIC-sale of mobile phones and CPUs – appellant’s repayment claim of £3,039,723.75 refused on grounds that the appellant knew or ought to have known that the transactions were part of an MTIC fraud -appellant knew that the deals were part of a VAT fraud –appeal dismissed – to see my post on this case, click here.

European Court of Justice

  • Able UK (VAT) [2012] EUECJ C-225/11 – Exemptions – Article 151(1)(c) – Supply of services of dismantling obsolete US Navy ships in the territory of a Member State
  • Balkan and Sea Properties (VAT) [2012] EUECJ C-621/10 – Sale of immovable property between connected companies – Value of the transaction – National legislation providing that for transactions between connected persons the taxable amount for VAT purposes is the open market value of the transaction

Canada

Supreme Court of Canada

  • Calgary (City) v Canada 2012 SCC 20 – Single supply or multiple supplies  ― City acquiring and constructing transit facilities ― City claiming and receiving public service body rebates for portion of GST paid ― City also claiming input tax credits in respect of GST paid on purchases made for transit facilities ― Whether acquisition and construction of transit facilities constituting an exempt supply, a taxable supply or both ― Whether “transit facilities services” a taxable supply to the Province separate from exempt supply of “public transit services” to public – to access my case summary click here

Tax Court of Canada

Commissioner issues two ATO IDs on intra-group supplies

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Today the Commissioner issued two ATO IDs on the implications of intra-GST group supplies where an entity subsequently leaves the GST group.  The IDs illustrates the problems that may arise due to the GST Act failing to include rules dealing with the time of supply.  In particular, in the second ID, the Commissioner appears to address the issue by inserting words into the legislation which are simply not there – in recent times the Federal Court has been reluctant to adopt such an approach.

ATO ID 2012/33 Goods and Services Tax: intra-group supply when an invoice is issued after recipient leaves a GST Group

The issue is whether s 48-40(2) of the GST Act applies to a supply made by entity A to entity B if it is made when the entities are in the same GST group, but the related invoice is issued when entity B is no longer a member of the GST group.  The Commissioner considers that the answer is yes – so that the supply is not a taxable supply as it was made at a time when both entities were members of the GST group.

The Commissioner acknowledges that the GST Act is silent on the issue of when a supply is made, also noting that Division 29 deals with attribution only and does not address the time of supply.

ATO ID 2012/34 Goods and Services Tax: intra-group supply of services that is partly performed after the recipient leaves the GST group

The issue is whether s 48-40(2) of the GST Act applies to a supply of services made from entity A to entity B, to the extent that the services are performed at a time when they are in the same GST group, despite the fact that some of the services are performed when B is no longer a member of the GST group.  The Commissioner considers that the answer is yes, but only to the extent that the supply was performed when both entities were members of the GST group.  To the extent that the services were performed after B left the GST group, the supply will be taxable.

The Commissioner saw the issue as whether s 48-40(2) applied “to the extent” that the supply was made when both entities were members of the GST group. Notwithstanding that the section does not contain those words, the Commissioner is of the view that the section should be interpreted in such a way as to allow apportionment of the supply – this is an interesting view, particularly considering the recent focus of the Courts on the words of the legislation, rather than taking a purposive view.  The basis for the Commissioner’s view is stated as follows:

At the time immediately following Entity B leaving the GST group, Entity A is still making a supply by continuing to perform the service, however from this point in time there is no longer a ‘supply that entity makes to another member’, because Entity B is not ‘another member’ for the purposes of paragraph 48-40(2)(a).  As such, a reasonable interpretation is that to the extent that the supply of services is performed after the recipient ceases to be a member, paragraph 48-40(2) no longer has application to that part of the supply.  Paragraph 48-40(2)(a) can be interpreted in this way, despite the absence of the words ‘to the extent’ in the provision.

One may question whether a Court would adopt such an approach, as it involves inserting words into the section which are not there.  What this ID does illustrates is the problems that can arise by reason of the GST Act not having any rules dealing with time of supply.

 

Treasury releases exposure draft regulations for Division 81 fees and charges

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Today the Assistant Treasurer released an exposure draft regulation and explanatory statement specifying the GST treatment of certain Australian government fees and charges.

The Treasury release states that exposure draft regulations prescribe fees and charges that will be treated as GST exempt, and fees and charges that will be treated as taxable supplies from 1 July 2012.  Also, the draft regulations will also ensure that the GST treatment of particular goods and services supplies by governmental related entities is consistent with the principles contained in the Intergovernmental Agreement on Federal Financial Relations.

Please see the following links:

Submissions are due by 30 May 2012.

Canadian Supreme Court hands down GST decision on single/multiple supplies

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Earlier this week, Canada’s highest Court handed down its decision in Calgary (City) v Canada  2012 SCC 20.  In a unanimous judgment, the Court found that the construction of transit facilities by the City of Calgary was a single exempt supply of “public transport services” to Calgary citizens rather than two supplies, being the exempt supply of “public transport services” and a separate taxable supply of “transit facilities services” to the Province – which would have entitled the City to input tax credits for the costs of construction.

The case is interesting because it is a judgement from a Court which is the equivalent to our High Court.  Also, the Court considers the following issues, which may have relevance to Australia and elsewhere:

  • Determining whether there is a single supply or multiple supplies
  • Whether preparatory work for a supply can be a supply in its own right
  • GST implications of funding agreements and performance of statutory obligations

For my detailed analysis of the decision, click here.

UK decision gives insight into scope of “carousel fraud” in the UK – losses in excess of £15 billion

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On 10 April 2012 the UK First Tier Tribunal handed down its decision in Sound Solutions (Europe) Ltd v Revenue & Customs [2012] UKFTT 251. The case provides an insight into the extent of “missing trader fraud” or “carousel fraud” in the UK, usually involving the sale of computer chips and mobile phones.

This type of VAT fraud received some focus in Australia recently in Multiflex (see [2011] FCAFC 142), where the Commissioner had a suspicion that an investigation would disclose that Multiflex did not in fact make creditable acquisitions giving rise to the claimed input tax credits.  The evidence of the Commissioner’s auditor was that three companies in the same group as Multiflex had been involved in “sham transactions through a supply chain”.  The arrangement was described as follows:

The first company in the supply chain imported electronic goods into Australia, they were then on-sold (usually on the same day) through several different intermediary or buffer companies.  These products were not entered into Australia for domestic consumption but remained in a bonded warehouse.  Each of the companies in the Mercantile Group…was the final link in the chain and operated as the exporter.  Non- reporting of GST by the “missing traders” in the supply chain has lead to revenue leakage.  The tax office position in that the supply chain was a contrived sham arrangement for which the Mercantile Group was a participant.  In the United Kingdom this type of fraud is called “missing trader intra-community fraud”.  The revenue leakage is caused by the non-reporting of GST by the “missing trader”.  This and similar frauds have apparently cost the Government in the United Kingdom a significant sum of tax revenue.

In the decision of the First Tier Tribunal, the evidence from the Revenue was that carousel fraud was rife from 2003 to 2007.  Further, any loss to the exchequer only occurs when the input tax is refunded on a repayment claim.  The Revenue was been repaying substantial sums of money, in many cases in excess of £10,000,000 and the total loss to the revenue during these years amounted to in excess of £15 billion.

The position in the UK on the refunds of input tax credits is similar to that considered in Multiflex, in that the refund provisions are in mandatory terms and that no element of discretion is conferred on the revenue.  Of course, the position in Australia will change if the amendments to the TAA to introduce s 8AAZLGA are introduced (giving the Commissioner the right to withhold refunds pending an investigation).  Interestingly, the law in the UK developed its own defence to the mandatory refund provisions. Because the claimant of the refund was usually a long way down a chain of transactions from the defaulting entity, the Courts extended the established principles of fraudulent evasion beyond evasion by the taxable entity to include those entities who knew or ought to have known that by their purchase they were taking part in a transaction connected with fraudulent evasion of VAT.  This enlarged the category of participants who did not satisfy the objective criteria of being entitled to claim credits to those who themselves had no intention of committing fraud, but who, by virtue of the fact that they knew or should have known that the transaction was connected with fraud, were to be treated as participants.

The decision of the First Tier Tribunal undertakes a detailed investigation into the development of the law in this area and the judgment shows the level of complexity and sophistication of these types of transactions.  One would suspect that such transactions are being undertaken in Australia, as is shown by the Multflex decision.  As to whether the level of such activity reaches the giddy heights of the UK experience, and the effect on these schemes of the proposed amendments to the TAA allowing the Commissioner to delay refund payments, time will tell.

Commissioner issues Rulings on GST and farm-out arrangements

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Yesterday the Commissioner published two rulings dealing with the GST treatment of farm-out arrangements;  MT 2012/1 Miscellaneous taxes: application of the income tax and GST laws to immediate transfer farm-out arrangements and MT 2012/1 Miscellaneous taxes: application of the income tax and GST laws to deferred transfer farm-out arrangements.  The rulings were initially in draft form in MT 2011/D1 and MT 2011/D2.  The rulings also refer to the newly issued A New Tax System (Goods and Services Tax) (Particular Attribution Rules where supply or acquisition made under a contract subject to preconditions) Determination 2012, which are to apply in certain circumstances in place of the attribution rules in Division 29 of the GST Act

Background to farm-out arrangements

The Rulings describe farm-out arrangements as follows:

  • they are common in the mining and petroleum industries and broadly speaking are arrangements entered into for the purpose of facilitating exploration for the discovery of minerals and petroleum resources.
  • A typical arrangement provides for the owner of an interest in a mining tenement (the farmor) to transfer a percentage of that interest to another party (the farmee) if the farmee meets specified exploration commitments or contributes monetary payments.
  • Often the commercial driver for such an arrangement from the farmor’s perspective is funding.  That is, the farmor giving up future economic benefits, in the form of reserves, in exchange for a reduction in future funding obligations.  For the farmee, it provides an opportunity to acquire an interest in a mining tenement.
  • Broady, farm-out arrangements may be divided into two types, being “immediate transfer” and “deferred transfer” farm-out arrangements.
Immediate transfer farm-out arrangement

Under an immediate transfer farm-out arrangement, an obligation to transfer a percentage interest in a mining tenement from a farmor to a farmee arises for the farmor upon entry into the agreement.  Typically, the farmor and farmee will also establish a joint venture or, if a joint venture is already in existence, the farmee will become a joint venturer.  In return for the transfer of the interest in the mining tenement, the farmee will undertake exploration commitments or contribute to a joint venture account on the farmor’s behalf for that purpose.  The farmee may also make cash payments to the farmor or to third parties to meet expenses incurred by the farmor.
The ruling considers that an immediate transfer farm-out arrangement is treated as a a sale of a percentage interest in a mining tenement by a farmor to a farmee, in return for the non-cash benefit of the services from the farmee undertaking exploration commitments (the “exploration benefit”), constructive receipt of cash payments made by the farmee to a joint venture to meet cash calls to fund expenses and any additional cash payments made by the farmee to the farmor
The GST implications are considered at paras [58] onwards, and can be summarised as follows:

  • under the terms of an immediate farm-out arrangement, there is a supply by the farmor to the farmee of an interest in a mining tenement;
  • if the supply of the interest is for non-monetary consideration only (ie, the exploration benefit), that is a barter transaction – the farmee also makes a supply to the farmor of the exploration benefit for non-monetary consideration.  On the basis that the parties are at arm’s-length, the GST-inclusive market value of these supplies will be the same.
  • the supply of the interest will also be for monetary consideration if the farmee; makes cash payments to the farmor, makes cash payments to third parties to meet expenses incurred by the farmor (thereby relieving the farmor from meeting those expenses) or makes cash payments to the joint venture account on the farmor’s behalf.
  • if total consideration is known, and the farmor or farmee accounts on a non-cash basis, the attribution rules in A New Tax System (Goods and Services Tax) (Particular Attribution Rules where supply or acquisition made under a contract subject to preconditions) Determination 2012 apply in place of the attribution rules in Division 29 of the GST Act
  • the going concern provisions may be available.
Deferred transfer farm-out arrangement

Under a deferred transfer farm-out arrangement, the transfer of the interest only occurs after the farmee has met all of the exploration commitments and any payment requirements to earn that interest (referred to as the “earn-in requirements) within a specified period of time.  The farmee is able to terminate the agreement at any time provided the mining tenement is in good order at the time of giving the notice of termination.  If the farmee does not satisfy the earn-in requirements during the period, the farmee does not earn the specified interest in the mining tenement.
The ruling views a deferred farm-out arrangement as the farmor granting the farmee a right (akin to an option) to acquire an interest in a mining tenement.  The farmee’s exercise of that right is subject to the farmee satisfying the earn-in requirements within the earn-in period.

The GST implications are dealt with at para [83] onwards in the ruling, and can be summarised as follows:

NZ Court of Appeal allows appeal by receivers against personal liability for GST

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In Simpson v Commissioner of Inland Revenue [2012] NZCA 126 the Court of Appeal has allowed an appeal against the decision of the High Court ([2011] NZHC 490) that receivers of a mortgagee who sold the mortgagor’s real property were “personally liable” for the GST.  However, the Court nevertheless ordered that the receivers pay the GST to the Commissioner (in preference to the secured creditor of the mortgagee) as the GST properly represented a cost of the sale of the property.

In this case, which has unusual facts, the mortgagee was a finance company which was not registered for GST.  The mortgagee went into receivership and after the receivers were appointed, a mortgagor defaulted on its loans which the mortgagee then sold.  The receivers accepted that the mortgagee was liable for the payment of GST in respect of the sale of the properties (in Australia, a mortgagee would be liable for the GST pursuant to Division 105 of the GST Act).  However, the receivers argued that because the mortgagee was in receivership and was unable to meet its debts, the Commissioner was an unsecured creditor and the receivers must first account to the secured creditor of the mortgagee for the amounts received as GST.

On appeal, the Court approached the matter on the basis that the authorities had established that a selling mortgagee is obliged to pay the GST charged on the supply of land in priority to any payment in respect of secured debts.  Further, the Court found that this was not altered by the appointment of receivers.  In doing so, the Court found that there was no policy in the GST Act of protecting secured creditors and that, far from being an unsecured creditor, the Commissioner is in a better position that secured creditors with respect to GST.  The Court also found that the GST simply did not reach the general funds of the mortgagee as it was a cost of the sale of the property.  Finally, while the Court found that the receivers did not have any personal liability to pay the GST, that did not mean that they were entitled to keep the GST and pass it on to the secured creditor.  As noted by the Court “The corollary of the receivers having no liability for CMI’s debts is that as agents they cannot have a greater claim to the proceeds of sale than CMI itself“.

In finding that the receivers did not have personal liability, the Court found that the provisions making receivers liable for GST on sales made by a company during a receivership (similar to s 58 under our GST Act) did not apply to a mortgagee sale.  Similar considerations should apply under our GST Act.  The Court also found that the High Court’s finding that the receivers were personally liable for GST was contrary to the clear wording of the legislation,which limited the liability for GST to the entity exercising the power of sale (in this case the mortgagee).  As noted by the Court, “The receivers may have been in actual control of the sale, but they could only conduct the sales by exercising the powers of CMI on its behalf, as its agents.”  Again, similar considerations should apply under Division 105 of our GST Act as the provision is arguably limited to the entity which makes the supply of the other entity.

Commissioner issues addendum to GSTR 2001/8 re apportioning consideration between taxable and non-taxable parts

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On 11 April 2012 the Commissioner issued GSTR 2001/8A3 – Addendum – Goods and Services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts.  To access the consolidated ruling, click here.

The purpose of the Addendum is to amend the ruling to reflect the reasoning of the Full Federal Court in Commissioner of Taxation v Luxottica Retail Australia Pty Ltd [2011] FCAFC 20 and the Administrative Appeals Tribunal in Re Food Supplier and Commissioner of Taxation [2007] AATA 1550, in respect of the calculation of the value of the taxable part of a mixed supply under s 9-80 of the GST Act.  Referring to Luxottica, the ruling states:

To work out the taxable proportion following the Full Federal Court decision, the value of the taxable part of the supply has to be determined by having regard to the facts and circumstances and taking a practical, common sense approach.  The question to be answered is what is a fair and reasonable measure of the value of the taxable part?

The Addendum also updates the commentary in the ruling on differentiating between mixed and composite supplies by making reference to recent case law.

Draft PSLA issued on treatment of input tax credits where refund of GST not given to supplier

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Yesterday the Commissioner issued Draft PSLA 3521 – Treatment of input tax credits claimed by a recipient where the Commissioner does not give a refund to the supplier due to the operation of s 105-65 of Schedule 1 to the TAA.

The purpose of the draft PSLA is “to explain the circumstances in which the Commissioner will allow a recipient to retain an input tax credit that it has claimed where a transaction was incorrectly treated by a supplier as giving rise to a taxable supply”.

The draft practice statement confirms that where a refund is not paid to a supplier who overpays GST because an arrangement is incorrectly treated as a taxable supply, the Commissioner will generally not require the recipient to repay over-claimed input tax credits or pay general interest charge.  This is referred to as ‘preserving the status quo’.

The practice statement is interesting because it effectively operates as an administrative override of the provisions of the GST Act and the TAA which cause the recipient to have a “GST shortfall” in these circumstances and to be exposed to recovery and the imposition of penalties and interest.  In this regard, to the extent that the Commissioner does not follow the practice statement, the law will otherwise apply.  Where there is truly a “status quo”, in the sense that GST was paid and credits were claimed, one can see the administrative ease of such an approach.  However, the matter may not be so clear where credits are claimed but for some reason the GST is not paid (e.g., the supplier defaults, goes into liquidation or the Commissioner is required to disgorge the payments as a preference claim).  In such circumstances the Commissioner is effectively “out of pocket” and recourse may be sought from the recipient to recover the over claimed credits.

Also, in some circumstances the recipient may want to “unwind the transaction”.  A ready example is the sale of real property where stamp duty is paid on the GST-inclusive price.

As always, the devil is in the detail.

The practice statement has a couple of useful examples.  The second example is where it is not appropriate to preserve the status quo (because the matter involved the sale of real property and the use of the margin scheme).  In such a case, the recipient (entity Y) would be required to pay the over claimed input tax credit.  The concerning part of the statement is what follows:

“The Commissioner would consider exercising the discretion to refund the overpaid GST to Entity X if Entity X reimbursed the overpaid GST component of the price to Entity Y.”

In circumstances where the recipient was required to repay the credits to the Commissioner and the recipient recovered that money from the supplier, it would appear to be a harsh result for the supplier that the Commissioner may only “consider” refunding the GST to the supplier (who would otherwise be out of pocket).